Gold prices fall for third straight day as dollar and Treasury yields rise

Highlights

Spot gold dropped 1.42%, extending its third consecutive daily decline.
Traders are fully priced in a December Fed rate hike.
Analysts see potential downside toward $3,870.

Spot gold fell 1.42% to $3,930.993 an ounce, while December gold futures declined 1.59% to $3,937.05, according to the latest market data. The retreat followed losses exceeding 3.7% over the previous two sessions. Traders had fully priced in a quarter-point Fed rate increase in December, Bloomberg reports.

Inflation data strengthen expectations of a Fed rate hike

Higher-than-expected U.S. consumer inflation in October has reinforced expectations that the Federal Reserve will continue tightening monetary policy. Chicago Fed President Austan Goolsbee expressed concern about the inflation figures, while some traders began considering the possibility of a larger, half-percentage-point increase rather than the widely expected quarter-point move.

The shift has been particularly visible in bond markets. Yields on two-year U.S. Treasuries, which closely reflect expectations for near-term interest rates, have climbed approximately 20 basis points this week. The U.S. Dollar Index also gained nearly 1% on Tuesday and Wednesday, making gold more expensive for investors holding other currencies.

Higher interest rates typically reduce the appeal of gold because the metal generates no interest income. As yields rise, investors face a greater opportunity cost when holding bullion instead of interest-bearing assets.

Gold faces further downside ahead of U.S. producer inflation

Market attention is turning to Friday's U.S. Producer Price Index report, which could provide additional evidence of persistent inflation. Christopher Wong, a strategist at Oversea-Chinese Banking Corp., identified $3,870 an ounce as a possible downside level if economic conditions continue to deteriorate for precious metals.

Investors will also assess remarks from Federal Reserve Governor Michael S. Barr and other policymakers on Thursday for clues about the December decision. Gold has struggled to recover after briefly trading above $4,100 late last month, when lower oil prices and improving equity sentiment provided temporary support.

Higher yields reshape the outlook for precious metals

Gold's weakness reflects a broader adjustment to expectations for U.S. monetary policy. With a December rate increase now fully priced in, stronger inflation data could push Treasury yields and the dollar higher, extending pressure on non-yielding assets.

The selloff has also affected other precious metals. Silver declined to $50.95 an ounce in the earlier trading session, while platinum weakened and palladium edged higher. For gold investors, Friday's inflation report will be a key test of whether prices can stabilize below $4,000 or move closer to the downside levels identified by analysts.

As we previously reported, China gold imports hit records as reserve diversification and safe-haven demand deepen.

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